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For years, JD Sports Fashion (LSE: JD.) wasn’t just the self-styled ‘King of Trainers’, it was pretty much king of the FTSE as well. I watched the trainers and athleisure seller’s shares grow and grow, agonising over whether I’d left it too late to hop on board, before deciding I had and moving on.
The board had big ambitions, opening thousands of stores worldwide, particularly in North America and Europe. Its multibrand model covering footwear, apparel and accessories drove sales and allowed the group to scale aggressively. It generated loads of cash too, which allowed it to expand by funding acquisitions such as Hibbett in the US and Courir in Europe.
But it lost its crown…
All went well while Western economies were healthy, but the cost-of-living crisis hammered consumer spending and JD Sports suffered two difficult Christmases in a row. I decided to take advantage of the first one, picking up its shares at a reduced price in January 2024. Sadly, its struggles have continued.
April’s hike to employer’s National Insurance contributions and an inflation-busting increase to the minimum wage have further squeezed margins, as JD Sports employs many young people. A large portion of its sales depends on major brands, particularly Nike, which has struggled itself.
Nothing rises or falls in a straight line, and JD Sports has shown fleeting signs of recovery. But then it was hit by fresh blows, such as Donald Trump’s tariffs and fears of a potential US recession. The JD Sports share price is now down 50% over five years and shows little sign of bottoming out, falling 33% in the last year alone.
On 24 September, the board confirmed it was on track to meet full-year profits guidance, as sales jumped 18% to £5.9bn in the 26 weeks to 2 August. Yet pre-tax profits fell 13.5% to £351m after some big investments.
On 5 November, broker Shore Capital highlighted a potential buying opportunity, praising the strong balance sheet, high margins and cash generation, but the shares are plunging again amid a wider market sell-off.
Cut-price value stock
Now here’s something optimistic. Sixteen analysts offering one-year forecasts for JD Sports produce a median share price target of 122.8p. If correct, it would mark a bumper rise of more than 60% from today’s price. However, I suspect many of those predictions were made before the recent slide, and can’t be be relied upon. Time will tell.
JD Sports has recovery potential, but it depends on factors largely out of the board’s control, such as the state of the US and European economies, and Nike boosting its wholesale pricing and margins. The board can boost efficiency, capital returns and cost control. But it won’t be enough on its own, until the economy springs back to life.
With a price-to-earnings ratio of 6.3, the shares look stupidly cheap. I think they’re worth considering for a far-sighted investor willing to endure short-term volatility. The model that made JD Sports a world-beating growth stock is still there, and with luck, the rewards should flow one day. I waited long enough to buy the stock. Now I’ll wait longer for the recovery.
